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The right loan or credit card can give you more financial freedom and open up exciting opportunities – from traveling the world to buying your first car or home. But borrowing money is a big responsibility, and it’s not a decision you should make lightly. Failing to use credit responsibly can damage your credit or lead to serious financial problems.  

While there are many different reasons why you might want financing, it’s important to ask yourself a few key questions before taking on this new financial commitment.

1. How’s My Credit?

A decent credit score shows prospective lenders that you are a responsible borrower and can be counted on to make your payments on time. In general, a credit score near 700 or higher is considered good, while 800+ is excellent. People with higher credit scores are more likely to obtain loans with the most affordable interest rates.

Before you apply for a loan, consider checking your credit reports for issues that could drag down your score. You can also view your score using American Heritage Federal Credit Union’s Online Teller. If your credit isn’t in great shape, take steps to start improving your credit first. Pay down other debts you may currently owe, and make sure you remain current on all payments.

If you’re new to borrowing, your first step is to establish credit. Consider getting a secured credit card, which is designed to help people start building credit or repair damaged credit. To open your secured card, you’ll need to put down a cash deposit (usually $200–$500), and your credit limit is typically equal to your deposit. Charges aren’t deducted from your security deposit, so you will have to make monthly credit card payments in order to start building your credit.

When you make on-time payments to your secured card, the lender will report that to the credit-rating agencies. Over time, your credit score will reflect your history of reliable payments, which can help you qualify for an unsecured credit card or other financing. American Heritage’s Platinum Secured Mastercard is a great way to get started building your credit.

2. What Kind of Loan Do I Need?

There are two different kinds of financing available to borrowers: secured and unsecured. A  car loan and mortgage are the most common types of secured loan. With an auto loan, if the borrower fails to make timely payments, the lender can repossess the vehicle. Likewise, with a mortgage, the lender can seize and sell the property to recover some of their losses.  

Alternatively, an unsecured loan is not protected by any collateral. The most common types of unsecured debt are credit cards, student loans, and personal loans. It can be harder to obtain unsecured financing, and it may come with higher interest rates, since it is riskier for the lender.

3. Do I Really Need Financing?

Whenever someone applies for a credit card or loan, the lender makes what is known as a “hard inquiry” to check the applicant’s credit score. These hard inquiries can temporarily decrease your credit score, so make sure you only apply for what you need. You should avoid taking on debt for discretionary expenses, such as designer clothes and new electronics.

Even though it can be tempting, you shouldn’t reply to all the credit card offers you receive in the mail. Be selective and only apply if it will help you meet your financial goals, and if you will be able to repay the loan.

4. Can I Handle (More) Debt?

When you apply for financing, lenders will evaluate your DTI, or debt-to-income ratio, to make sure you’ll be able to keep up with your monthly payments. DTI compares how much you owe each month to how much you earn. Specifically, it’s the percentage of your gross monthly income (before taxes) that goes toward your monthly payments for rent or mortgage, credit cards, and all other debts, including student loans or child support.

Although the range of acceptable DTI ratios varies based on the lender and type of loan you are applying for, borrowers with lower DTIs are more likely to be approved and receive the best loan terms.

5. What Will My Monthly Payments Be?

When you borrow money, whether you commit to a car loan or open a new personal loan, there is an APR, or annual percentage rate, attached to the loan. APR is the lender’s financing charge that’s applied on top of your principal (the actual amount you’ve borrowed) and is stated as a yearly rate. For installment loans, such as personal loans, mortgages, or auto loans, part of your monthly payment will go toward the principal as well as interest. You can use American Heritage’s financial calculators to help figure out what your approximate payment amount will be each month based on the amount you borrow and interest rate.

For revolving lines of credit such as a credit card, you will only pay interest on balances that you carry from month to month. Therefore, it is possible to avoid paying interest on your credit card by paying it off in full each and every month.

Responsibly using debt can help you establish and maintain good credit. Just remember to pay in full and on time every month. Failing to pay on time can lead to late fees, which increase the amount you owe, and may be reported to credit-rating agencies, hurting your credit score.

In addition, you’ll want to protect your credit score by staying well below your credit limit for credit cards. When it comes to your credit utilization ratio – that is, how much of your available credit you are using – experts recommend keeping the percentage below 30%. So, if you have a $1,500 limit on your credit card, you want to keep your balance below $500.

6. Who Is the Best Lender for Me?

Your local credit union! As a member-owned financial institution, American Heritage Credit Union is focused on supporting the financial well-being of our members and community. One way we do this is by offering flexible, affordable financing options to our members.  

If it’s the right time for you to borrow, talk to us. Whether you are shopping for a new house or a new car, we have affordable loans to meet your needs, and a local team that’s here to make the process as simple as possible.